India Q2 growth slows to 5.3 percent, boosting rate cut hopes

India said Friday the economy grew 5.3 percent from July-September year-on-year, significantly slower than the previous three months, stirring hopes of interest rate cuts to boost investment. The performance was a little better than market forecasts of 5.1-percent expansion in the second quarter of the financial year, but still a sizeable downturn from 5.7-percent growth in the previous three months.

The data was released days before the hawkish Reserve Bank of India (RBI), which has held its benchmark lending rate at a steep eight percent since last January, meets for its regular monetary policy review. The latest figures "build on the growing case for rate cuts", said Shilan Shah, analyst at research house Capital Economics.

"There is increasing slack in the economy, consumer price inflation has slowed further than most expected, and the current account has narrowed sharply over the past year," said Shah. Jumpstarting growth is key for India's new Prime Minister Narendra Modi, who led his right-wing Bharatiya Janata Party to a massive electoral win in May on promises to revive Asia's third-largest economy.

India has been mired in its worst slowdown in two decades. Growth was 4.7 percent in the last financial year - around half of the near double-digit levels seen a few years ago - hit by high interest rates to curb inflation, a lacklustre global economy and a fall in foreign investment amid corruption scandals which embroiled the previous Congress government. The central bank has forecast growth of 5.5 percent this year, slightly below the government's target of 5.8 percent. These figures may seem high by the standards of developed nations, but economists say India needs at least eight-to-nine percent growth to create jobs for a ballooning youth population.

A breakdown of the latest growth figures showed activity slowed in most sectors over the quarter. Notably, growth in the manufacturing sector softened to just 0.1 percent year-on-year, down from 3.5 percent expansion in the previous three months. The figures also showed a sharp slowdown in investment and net exports. Economic growth is likely to remain sluggish in the near-term with industrial production still moribund, analysts added.

Most economists expect the RBI, which has vowed to "break the back" of chronic inflation, to hold interest rates steady until the of the next financial year in April. But some expect the bank to begin lowering rates as early as the policy meeting on Tuesday. "There's a good chance policy will be loosened in the RBI's policy review," said Capital Economics' Shah. He forecast a quarter-point cut in the so-called repo rate at which the RBI lends money to commercial banks, and a quarter-point reduction in the reverse repo rate at which the RBI borrows from commercial banks.

India's benchmark Sensex share index closed up nearly one percent at a record high of 28,693.99 points on hopes that slowing growth, declining inflation and a slide in crude oil prices will pave the way for a rate cut. India's Finance Minister Arun Jaitley has been pressing central bank governor Raghuram Rajan to lower interest rates at the monetary policy review to boost the stuttering economy.